Intel’s good 2Q14–and Wall Street’s strong reaction to it

Last month, Intel (INTC) announced to the market that its 2Q14 was shaping up better than the guidance it had given when it announced 1Q14 earnings. Analysts covering INTC (a pretty pedestrian lot, in my view) dutifully raised their estimates to incorporate this news. The new consensus was centered around $.52 a share in eps for the quarter. The stock began a 15% move higher.

A week or so ago, research firms that follow the PC industry began to suggest that the personal computer market is beginning to bottom out after a long slide. At the same time, these firms observed that the tablet market is starting to fall off. Some put the two observations together into a story that the tablet market was waning because customers were either finding them inherently unsatisfactory or poor value in comparison with chrome- or ultrabooks. AAPL appeared to confirm this analysis with its announcement of a partnership with IBM to sell iPads equipped with IBM software to corporations.

INTC reported earnings of $.55 a share after the close on Tuesday (a full analysis in tomorrow’s post). The company also raised its revenue guidance for full-year 2014 from flat to up 5% (corporate strength, the hope that consumer demand will rebound, plus the one-time positive of wholesalers beefing up their inventories a bit). My take: good news–not earthshattering, but good–and pretty much in line with data that had been coming into the market over the past while.

But no.

Yesterday INTC was up by 9%+ on quadruple normal volume, in a flat market. MSFT, the other member of the once-dominant “Wintel alliance,” gained almost 4% on more than double normal volume.

As a holder of INTC and MSFT, I’m happy to have the gain. But I find the market action a bit excessive.

I have two reactions:

–it may be that part of the rise has nothing much to do with Wintel but is the market rotating toward large-cap tech laggards. If so, it would be a sign that the upward market momentum of the past nine months or so is in its final stages.

–for INTC, the “free lunch” stage is over. On earnings of, say, $2.10 in 2014 and $2.25 in 2015 (figures that are higher than Wall Street’s current median, though admittedly some analysts may not have published post-earnings call adjustments), INTC is no longer stunningly cheap. To continue to hold the stock, we have to believe that the PC business is at least stable and that INTC’s foray into tablet/smartphone chips will at least get to breakeven within a couple of years.

While I may trim my position further (as I’m writing this, I haven’t yet), I like what INTC is doing and am content to remain a holder.